Posted On Google Finance Board by DAYTRADER AUG 23RD 1:40 a.m.
A good post to save
Written posted by daytrader951
SPNG is a two-part investment -- the fundamentals and the (potential) squeeze. FUNDAMENTALS: 1. They sell high-tech sponges. Until fairly recently, they have mostly been selling the auto sponge, but they have a pet sponge and a Spongebob kid bath sponge. They have also just yesterday begun shipping their anti-microbial sponge targeting the cleaning needs associated with swine flu. They are developing kitchen/bath cleaning sponges and have confirmed that they have done focus group work with Reckitt Benckiser (Lysol) regarding a Lysol/Spongetech branded product – and at the June 8 Noble investor conference (Noble) they indicated that they are in late stage negotiations with the “biggest” name in this business (and Lysol is the #1 surface disinfectant). They have also mentioned a sunscreen sponge and some pharma applications. They have also signed deals for the kid sponges with Viacom to do Dora and Go Diego, as well as with MGM (Pink Panther, which is going to be polished up and re-released). There are rumors of other kid character sponges. 2. They have had huge success penetrating domestic mass retail (Costco, CVS, Walgreens, Jewel/Osco, Duane Reade, ACE, Krogers, Price Chopper, etc). They are advertised on Howard Stern and a ton of sports venues. The pet sponge is in Petco and Petsmart. The auto sponge also sells overseas, including Walmart South America. And at Noble we saw Walmart listed for the first time as a retail. In the past, Metter (CEO) has given as a target trying to get SPNG into 100,000 retail “doors”. At Noble he stated it as a fact that by the end of this summer they would achieve that goal! (Just imagine if they could net $0.50 per day per retail store. That would be $18mm in earnings per year... This is just an interesting back of the envelope calculation. See the more detailed discussion below.) 3. They are growing at a very rapid pace. Revs for all of fiscal 2008 (which ended May 31, 08) were 5.6mm. They just announced prelimary numbers for fiscal 2009 that were nearly 10 times higher (“over $50mm”). Recent recent orders plus the Spongebob sponge’s potential suggests we are on a pace to do over $200mm in fiscal 2010 (which started June 1). 4.a. Net margins have declined from 20 percent to 11 percent in the most recent quarterly filing (Q3 09, ended 28 Feb). A big chunk of the decline is that they now pay taxes. Also, they appear to have experienced some natural margin compression in the process of accessing mass retail. On the other hand, advertising as a percentage of revenue is going down (basically, ad spending, while large, is not rising as fast as revenues). 4.b. Earnings growth has been solid. Based on the preliminary numbers (and allowing for taxes at the same rate paid in Q3 09), the Q4 net (after-tax) income was $2.51mm. This is $0.00348 per share (using the 4/16 OS of 722mm) – or annualizing (mult by 4) gives about 1.4 cents of EPS (or more if OS comes down and earnings grow). Here’s the quarter by quarter net after-tax income. In looking at this, note that the dip down in Q3 09 is because they started having to pay taxes. The pre-tax numbers grow more evenly: Q2 08 $8,668 Q3 08 $188,482 Q4 08 $1,055,973 Q1 09 $1,076,053 Q2 09 $2,320,985 Q3 09 $1,513,422 Q4 09 $2,508,351 5. They are doing a great job collecting their receivables. For me, the key is to compare A/R to quarterly revenues. This has been relatively stable. This is important -- they had 14mm of A/R on the books. If they weren't collect it, that would obviously be a huge red flag. Well, the ratio (A/R)/Rev in the past several quarters was: 0.78, 0.91, 0.64, 0.88, 1.06. 6. When looking at the balance sheet, take care to understand the advertising pre-pays and pre-paid production. They have to put cash out the door to get advertising and to get sponges to sell. For some reason, this has mystified some posters. Yes, it is a drain on cash, but it lowers cash outlays in the future. Not rocket science, but perhaps easy to miss. 7. All of this growth requires capital. Where do they get financing? They get it by selling shares to RME, a company controlled by management. These guys have a lot of money (Carter's clothes is a family biz). So, no need for the classic toxic financing. They have issued a ton of shares to RME since Jan 08, but here's the kicker: RME HAS GIVEN SPNG THE OPTION TO BUY BACK A LARGE CHUNK OF THE SHARES AT THE ISSUE PRICE AT ANY TIME UNTIL SPRING OF 2010. DO YOURSELF A FAVOR AND MODEL THIS TWO WAYS -- once with the full number of shares (722mm as of 4/16) and again with the 480mm RME shares treated like a loan. Indeed, most of the RME shares are DOUBLY RESTRICTED. They are unregistered and they are covered by the option grants (so that selling would put them in the position of having issued uncovered calls). The RME options are in 2 parts. The first is in the July 2008 8K. The second (for the more recently-issued shares) has been discussed in a PR, but we have not seen this in an SEC filing. 8. Can we expect further share reductions? Well, back when I first got involved with SPNG, they were saying they wanted to eventually get the O/S down to 100mm. Now I think they are targeting a number maybe twice that. But perhaps more important if you are making an investment is what they have stated in their SEC-filed docs. In Q3 09, they said that they had an additional 133mm RM shares that they would retire (bringing OS down from 722mm to 589mm. Plus, they have at least 55mm (and I would guess closer to 100mm now) share to retire from the buyback from the float. Thus, I think a reasonable near term target would be somewhere around 500mm. IF they can get rid of most or all of the RM shares and get OS down to 250mm or lower, then that would be unreal. 9. If all 2B authorized shares are out there and not being bought back, then we would have revs of 200M in 2010, earnings of 20M, and EPS of 1 penny per share. At 722, we are at about 3 cents EPS. IF the RME shares disappear and/or they buy back more to get to management's target of 200mm, then EPS would be 10 cents. If they attain this lower OS, then we would be looking at fundamentals that support a price over 50 cents on a very conservative P/E of 5 (or a share price of $1 on a P/E of 10). So, there is considerable value here, even if we never see a squeeze... THE SQUEEZE 9. I am deeply skeptical when folks complain about colluding market makers and evil naked shorters. But in this instance there might indeed be a VERY large short position that does not show up on the official short interest stats. The story I have seen posted is that shorts sold a ton of shares back in 07 or early 08 and then approached management. They said they would go away if management sold them the covering shares at a low price. Management did not want to dilute the float in this way, so they told them to f*** off. This short position has grown over time – and now management is in a position to move decisively. 10. What is the evidence of a short position? Well, as of 4/16 we had just over 200mm tradable shares (722mm O/S – 480mm RM – 25mm officer shares on 08 10k = about 200mm). Doug Furth is reputed to own that many or more -- and he has filed a 13G for a fund he runs (41mm in the filing). There is a second 13G of 40mm (some members of that 13G have sold, but others have bought more. S Moskowitz (COO) is reputed to own a ton as well. He reputedly used BMAS -- a market maker that ALWAYS appears on the bid, never on the ask. (Note that management does NOT need to report these, because they file as a 1933 Act company -- their assets fall below the 1934 Act threshold.) Remember that SPNG was trading at $0.006 not all that long ago. At that price, an additional 100mm shares would have only cost SM $600k. Then there have been various investor polls that routinely come up with more ownership than the tradable. The DrStock post that is often bumped discusses a group holding 170mm shares among a relatively small group of investors. I personally know of over 20mm other shares by folks not in that group. And there were 7000 shareholders as of a month ago (probably more now). Try to fit all of that into 200mm tradable shares! And try to explain the volume, when so many of the shares are in strong hands! Really, I defy you to explain this to me without there being a short of AT LEAST 400mm. 11. Can the shorts cover? This is a very interesting question! I strongly suspect that tightly held large positions by insiders and Doug Furth and possibly some of our recent buyers HAVE **EACH** FRICKIN CORNERED THE SHORTS. That means that the shorts would have to buy all of the shares held by retail longs and they'd STILL BE SHORT until they knock on Doug Furth’s door and ask him what he wants them to pay. And even then they would STILL BE SHORT until they knock on Steven Moskowitz's door and find out what he is asking. Shades of VW and Porsche – except that Porsche had to back off once it became clear that the entire German financial system was at risk. SPNG could be a larger squeeze in percentage terms. And remember – the shorts tried to destroy SPNG over the past 18 months. This payback has been a long time coming, but what is they say about revenge being a meal best served cold? 12. So what will bring the shorts to the table? What will make them cover? Back when I posted an earlier version of this in December 08, I wrote that the most likely scenario would be "the company reverse merges into a shell company. Or perhaps a dividend or CUSIP change. Or, maybe they get taken private." Hmmmmm. Did anyone notice a PR just a while ago about applying to uplist to Nasdaq? A reverse merger into Nasdaq requires the controlling company to file an application for listing and the company must meet all requirements EXCEPT FOR PRICE... I have no idea what is going to happen, but I think one has to consider it a strong possibility that SPNG is going to do a reverse merger with a small Nasdaq company, which would force the shorts to cover.
(1 user) More options Aug 23, 1:40 am
From: daytrader951 <scueva...@aol.com>
Date: Sat, 22 Aug 2009 22:40:08 -0700 (PDT)
Local: Sun, Aug 23 2009 1:40 am
Subject: SPNG PRIMER
Reply | Reply to author | Forward | Print | Individual message | Report this message | Find messages by this author
SPNG is a two-part investment -- the fundamentals and the (potential)
squeeze.
FUNDAMENTALS:
1. They sell high-tech sponges. Until fairly recently, they have
mostly been selling the auto sponge, but they have a pet sponge and a
Spongebob kid bath sponge. They have also just yesterday begun
shipping their anti-microbial sponge targeting the cleaning needs
associated with swine flu. They are developing kitchen/bath cleaning
sponges and have confirmed that they have done focus group work with
Reckitt Benckiser (Lysol) regarding a Lysol/Spongetech branded product
– and at the June 8 Noble investor conference (Noble) they indicated
that they are in late stage negotiations with the “biggest” name in
this business (and Lysol is the #1 surface disinfectant). They have
also mentioned a sunscreen sponge and some pharma applications. They
have also signed deals for the kid sponges with Viacom to do Dora and
Go Diego, as well as with MGM (Pink Panther, which is going to be
polished up and re-released). There are rumors of other kid character
sponges.
2. They have had huge success penetrating domestic mass retail
(Costco, CVS, Walgreens, Jewel/Osco, Duane Reade, ACE, Krogers, Price
Chopper, etc). They are advertised on Howard Stern and a ton of sports
venues. The pet sponge is in Petco and Petsmart. The auto sponge also
sells overseas, including Walmart South America. And at Noble we saw
Walmart listed for the first time as a retail. In the past, Metter
(CEO) has given as a target trying to get SPNG into 100,000 retail
“doors”. At Noble he stated it as a fact that by the end of this
summer they would achieve that goal! (Just imagine if they could net
$0.50 per day per retail store. That would be $18mm in earnings per
year... This is just an interesting back of the envelope calculation.
See the more detailed discussion below.)
3. They are growing at a very rapid pace. Revs for all of fiscal 2008
(which ended May 31, 08) were 5.6mm. They just announced prelimary
numbers for fiscal 2009 that were nearly 10 times higher (“over
$50mm”). Recent recent orders plus the Spongebob sponge’s potential
suggests we are on a pace to do over $200mm in fiscal 2010 (which
started June 1).
4.a. Net margins have declined from 20 percent to 11 percent in the
most recent quarterly filing (Q3 09, ended 28 Feb). A big chunk of the
decline is that they now pay taxes. Also, they appear to have
experienced some natural margin compression in the process of
accessing mass retail. On the other hand, advertising as a percentage
of revenue is going down (basically, ad spending, while large, is not
rising as fast as revenues).
4.b. Earnings growth has been solid. Based on the preliminary numbers
(and allowing for taxes at the same rate paid in Q3 09), the Q4 net
(after-tax) income was $2.51mm. This is $0.00348 per share (using the
4/16 OS of 722mm) – or annualizing (mult by 4) gives about 1.4 cents
of EPS (or more if OS comes down and earnings grow).
Here’s the quarter by quarter net after-tax income. In looking at
this, note that the dip down in Q3 09 is because they started having
to pay taxes. The pre-tax numbers grow more evenly:
Q2 08 $8,668
Q3 08 $188,482
Q4 08 $1,055,973
Q1 09 $1,076,053
Q2 09 $2,320,985
Q3 09 $1,513,422
Q4 09 $2,508,351
5. They are doing a great job collecting their receivables. For me,
the key is to compare A/R to quarterly revenues. This has been
relatively stable. This is important -- they had 14mm of A/R on the
books. If they weren't collect it, that would obviously be a huge red
flag. Well, the ratio (A/R)/Rev in the past several quarters was:
0.78, 0.91, 0.64, 0.88, 1.06.
6. When looking at the balance sheet, take care to understand the
advertising pre-pays and pre-paid production. They have to put cash
out the door to get advertising and to get sponges to sell. For some
reason, this has mystified some posters. Yes, it is a drain on cash,
but it lowers cash outlays in the future. Not rocket science, but
perhaps easy to miss.
7. All of this growth requires capital. Where do they get financing?
They get it by selling shares to RME, a company controlled by
management. These guys have a lot of money (Carter's clothes is a
family biz). So, no need for the classic toxic financing. They have
issued a ton of shares to RME since Jan 08, but here's the kicker: RME
HAS GIVEN SPNG THE OPTION TO BUY BACK A LARGE CHUNK OF THE SHARES AT
THE ISSUE PRICE AT ANY TIME UNTIL SPRING OF 2010. DO YOURSELF A FAVOR
AND MODEL THIS TWO WAYS -- once with the full number of shares (722mm
as of 4/16) and again with the 480mm RME shares treated like a loan.
Indeed, most of the RME shares are DOUBLY RESTRICTED. They are
unregistered and they are covered by the option grants (so that
selling would put them in the position of having issued uncovered
calls). The RME options are in 2 parts. The first is in the July 2008
8K. The second (for the more recently-issued shares) has been
discussed in a PR, but we have not seen this in an SEC filing.
8. Can we expect further share reductions? Well, back when I first got
involved with SPNG, they were saying they wanted to eventually get the
O/S down to 100mm. Now I think they are targeting a number maybe twice
that. But perhaps more important if you are making an investment is
what they have stated in their SEC-filed docs. In Q3 09, they said
that they had an additional 133mm RM shares that they would retire
(bringing OS down from 722mm to 589mm. Plus, they have at least 55mm
(and I would guess closer to 100mm now) share to retire from the
buyback from the float. Thus, I think a reasonable near term target
would be somewhere around 500mm. IF they can get rid of most or all of
the RM shares and get OS down to 250mm or lower, then that would be
unreal.
9. If all 2B authorized shares are out there and not being bought
back, then we would have revs of 200M in 2010, earnings of 20M, and
EPS of 1 penny per share. At 722, we are at about 3 cents EPS. IF the
RME shares disappear and/or they buy back more to get to management's
target of 200mm, then EPS would be 10 cents. If they attain this lower
OS, then we would be looking at fundamentals that support a price over
50 cents on a very conservative P/E of 5 (or a share price of $1 on a
P/E of 10). So, there is considerable value here, even if we never
see a squeeze...
THE SQUEEZE
9. I am deeply skeptical when folks complain about colluding market
makers and evil naked shorters. But in this instance there might
indeed be a VERY large short position that does not show up on the
official short interest stats. The story I have seen posted is that
shorts sold a ton of shares back in 07 or early 08 and then approached
management. They said they would go away if management sold them the
covering shares at a low price. Management did not want to dilute the
float in this way, so they told them to f*** off. This short position
has grown over time – and now management is in a position to move
decisively.
10. What is the evidence of a short position? Well, as of 4/16 we had
just over 200mm tradable shares (722mm O/S – 480mm RM – 25mm officer
shares on 08 10k = about 200mm). Doug Furth is reputed to own that
many or more -- and he has filed a 13G for a fund he runs (41mm in the
filing). There is a second 13G of 40mm (some members of that 13G have
sold, but others have bought more. S Moskowitz (COO) is reputed to own
a ton as well. He reputedly used BMAS -- a market maker that ALWAYS
appears on the bid, never on the ask. (Note that management does NOT
need to report these, because they file as a 1933 Act company -- their
assets fall below the 1934 Act threshold.) Remember that SPNG was
trading at $0.006 not all that long ago. At that price, an additional
100mm shares would have only cost SM $600k. Then there have been
various investor polls that routinely come up with more ownership than
the tradable. The DrStock post that is often bumped discusses a group
holding 170mm shares among a relatively small group of investors. I
personally know of over 20mm other shares by folks not in that group.
And there were 7000 shareholders as of a month ago (probably more
now). Try to fit all of that into 200mm tradable shares! And try to
explain the volume, when so many of the shares are in strong hands!
Really, I defy you to explain this to me without there being a short
of AT LEAST 400mm.
11. Can the shorts cover? This is a very interesting question! I
strongly suspect that tightly held large positions by insiders and
Doug Furth and possibly some of our recent buyers HAVE **EACH**
FRICKIN CORNERED THE SHORTS. That means that the shorts would have to
buy all of the shares held by retail longs and they'd STILL BE SHORT
until they knock on Doug Furth’s door and ask him what he wants them
to pay. And even then they would STILL BE SHORT until they knock on
Steven Moskowitz's door and find out what he is asking. Shades of VW
and Porsche – except that Porsche had to back off once it became clear
that the entire German financial system was at risk. SPNG could be a
larger squeeze in percentage terms. And remember – the shorts tried to
destroy SPNG over the past 18 months. This payback has been a long
time coming, but what is they say about revenge being a meal best
served cold?
12. So what will bring the shorts to the table? What will make them
cover? Back when I posted an earlier version of this in December 08, I
wrote that the most likely scenario would be "the company reverse
merges into a shell company. Or perhaps a dividend or CUSIP change.
Or, maybe they get taken private." Hmmmmm. Did anyone notice a PR just
a while ago about applying to uplist to Nasdaq? A reverse merger into
Nasdaq requires the controlling company to file an application for
listing and the company must meet all requirements EXCEPT FOR PRICE...
I have no idea what is going to happen, but I think one has to
consider it a strong possibility that SPNG is going to do a reverse
merger with a small Nasdaq company, which would force the shorts to
cover.
